Moody's Downgrades CVRD's Local Currency Issuer rating to Baa3; confirms other ratings and Inco's ratings; Outlook Stable
Approximately $4.1 billion in Rated Debt Securities Affected
New York, October 25, 2006 -- Moody's Investors Service downgraded Companhia Vale do Rio Doce
(CVRD)'s local currency issuer rating to Baa3 from Baa1.
At the same time, Moody's confirmed CVRD's Aaa.br National
Scale Rating, its Baa3 foreign currency rating and the Baa3 foreign
currency rating of its wholly owned subsidiary Vale Overseas Ltd.,
guaranteed by CVRD. The foreign currency rating reflects Moody's
piercing methodology. Moody's also confirmed the Baa3 senior unsecured
debt rating of Inco Limited (Inco),. The rating outlooks
for both companies are stable. These actions follow the announcement
by CVRD that it has acquired 75.7% of the shares of Inco
and concludes Moody's review of CVRD's ratings that was initiated
on August 11, 2006 and Inco's on June 26, 2006.
On October 24, 2006, CVRD announced that it has acquired 75.7%
of the shares of Inco, and has stated its intention to take steps
to acquire the remaining shares, which would bring the total consideration
value to $18 billion. Within 60 days of the acquisition
of 100% of the shares of Inco, CVRD plans to have Inco provide
an upstream guarantee to the lenders under CVRD's $18 billion
bridge acquisition facilities. CVRD intends to refinance the bridge
facilities in the long term capital markets at the CVRD level, without
provision of an upstream guarantee from Inco.
The downgrade of CVRD's local currency rating reflects the significant
additional debt being incurred to finance its acquisition of Inco,
with an absolute level of debt approximating $23 billion on a proforma
basis. The downgrade also reflects challenges over CVRD's
ability to integrate Inco in a timely fashion from a number of perspectives:
reporting systems, cultural assimilation and achieving a common
culture, labor concerns, and project execution risk.
The rating also captures CVRD's substantive capital expansion plans
that may hamper the planned deleveraging over the next 15 months,
which ability also relies on continued robust commodity prices together
with asset sales.
The rating however, acknowledges CVRD's leading global positions
in the iron ore and nickel markets, the improved breadth and geographic
scope of its business platform and its important niche positions in bauxite,
alumina, aluminum and logistics (within Brazil).
The confirmation of Inco's Baa3 rating reflects the very strong cash generating
ability of the company given current nickel and other metals prices,
and Moody's expectation that metals prices, while likely to
moderate from current levels, will remain sufficiently robust to
permit Inco to continue to generate strong cash flow before capital expenditures.
Moody's notes that while the effective leverage of Inco will increase
substantially given the upstream guarantees provided to CVRD, the
Baa3 rating assumes that the guarantees will be eliminated over the next
few months with the planned refinancing of CVRD bridge loan.
Inco's current financial position indicates a rating higher than
Baa3, however, the rating is constrained by uncertainty about
Inco's future financial policies given its ownership by CVRD,
including dividends that may be paid to CVRD, Inco's ongoing
capital structure, capital expenditure levels, and investments
that may be undertaken within Inco. The rating also reflects the
continued difficulties at Goro, including cost pressures,
development delays and indigenous issues.
The stable outlook for the ratings of both companies reflect the strong
market positions and expanded market position in a number of key minerals.
The outlook also incorporates Moody's expectations for above average,
albeit moderating, LME nickel and copper prices as well as contracted
iron ore prices over the intermediate term. An important component
of the outlook is the expectation that CVRD remain committed to reducing
debt to more manageable levels over the next fifteen months.
Downgrades:
..Issuer: Companhia Vale do Rio Doce - CVRD
....Issuer Rating, Downgraded to Baa3
from Baa1
Outlook Actions:
..Issuer: Companhia Vale do Rio Doce - CVRD
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Inco Limited
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Vale Overseas Ltd.
....Outlook, Changed To Stable From
Rating Under Review
Confirmations:
..Issuer: Companhia Vale do Rio Doce - CVRD
....Issuer Rating, Confirmed at Aaa.br
....Senior Unsecured Shelf, Confirmed
at (P)Baa3
..Issuer: Inco Limited
....Corporate Family Rating, Confirmed
at Baa3
....Subordinate Conv./Exch.
Bond/Debenture, Confirmed at Ba1
....Senior Unsecured Conv./Exch.
Bond/Debenture, Confirmed at Baa3
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa3
..Issuer: Vale Overseas Ltd.
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa3
....Senior Unsecured Shelf, Confirmed
at (P)Baa3
CVRD is the world's largest producer of iron ore, with an
estimated 32% of the global seaborne iron ore market. CVRD
also has substantial interests in bauxite, alumina and aluminum,
copper concentrate, potash, logistics, including railroad,
shipping, and port handling operations in Brazil, and minority
interests in steel production. Following the acquisition of Inco,
the second largest global nickel producer, CVRD now ranks among
the largest mining enterprises in the world. On a pro forma basis
for FY2005, CVRD had shipments of approximately 225 million tons
of iron ore and 246,000 tons of nickel, generating revenues
of roughly $17 billion.
Headquartered in Rio de Janeiro, Brazil, CVRD reported revenues
of $12.8 billion in 2005.
Inco is based in Toronto, Canada, with reported revenues of
$4.5 billion in 2005.
New York
Brian Oak
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Carol Cowan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
